Ethereum is the second biggest cryptocurrency for several years. However, the Ethereum blockchain has been stumbling with increasing problems such as rising gas fees, low transaction speeds, and poor scalability. These are the reasons why the Ethereum Merge occurs. This article is all about the Ethereum merge aka the conversion of the consensus mechanism from Proof-of-Stake to Proof-of-Work. Let’s take a look at it in more detail.
In this article, we will explain the Ethereum Merge, what are the grounds, and try to envision the potential impact on the Ethereum price and the crypto market as a whole.
What is the Ethereum Merge?
The Ethereum Merge represents the transformation of the consensus mechanism for validating transactions in the Ethereum network from Proof-of-Work to Proof-of-Stake. The Ethereum Blockchain should perform faster and more efficiently after this merge. The scalability of Ethereum and the efficiency of its smart contracts should be massively improved.
The Ethereum Merge is an incredibly complicated process that has been flying on Ethereum for more than a year now. This is also called Update Ethereum 2.0. The update contains some bland actions to transition the whole network to the trendy consensus mechanism. The launch should eventually take place in the third quarter of 2022.
What is Proof of Stake and What Makes Proof-of-Stake So Much More Rewarding for Ethereum?
Unlike the proof of work approach, in which the user establishes transactions and creates distinct blocks by performing a definite amount of computational function, the proof of stake method requires the user to establish control of a definite number of cryptocurrency factors. The creator of a new block is chosen in a pseudo-random operation, relying on the user’s assets, also defined as ‘stake’. In the proof of stake method, blocks are said to be reproduced or produced, not mined. Users who establish transactions and create new blocks in this method are mentioned as forgers.
In most proof of stake cases, cryptocurrency divisions are created at the launch of the currency, and their amount is decided. Therefore, rather than employing cryptocurrency characteristics as a prize, the forgers receive transaction fees as prizes. On several occasions, new currency blocks can be created by mounting the coin stack, and forgers can be paid with new currency blocks created as prizes, rather than transaction expenses.
Now, Ethereum has been operating with the Proof-of-Work consensus mechanism for years. The network has become the most widely utilized protocol for dApps and is a leader in NFTs and DeFi. So why the necessity to switch to the proof-of-stake consensus mechanism?
Unfortunately, the proof-of-work has generated some issues in the last few months and years. While this consensus mechanism is safe and trustworthy, it has its boundaries when it comes to making transactions speedy while keeping expenses low. Unfortunately, with a massively expanding network like Ethereum, there have been huge gains in the expenses of transactions in recent years and the speed is not ideal.
A change was, thus, required and the developers at Ethereum identified the necessity to update the network. Hence, the consensus mechanism in the Ethereum Merge should be modified. Other small modifications are also being completed to make Ethereum more efficient and safe.
What is the history of the Ethereum merge?
Ethereum creator Vitalik Buterin is viewed as one of the early advocates of the Proof-of-Stake consensus mechanism. Thus, it is not unexpected that Ethereum has been working strongly on the transition for a long time. Compared to proof-of-work, the consensus mechanism is said to lower energy consumption by up to 99.5%.
For the past few months, the team behind Ethereum has been working on a prolonged and fierce implementation strategy. There were invariably pauses and delays. But this is just a sign of a method that needs extremely accurate execution and testing. Accordingly, the transformation is hauling on for several months. The components of the Ethereum merge are:
- the beacon chain
- the merge
- the shard chains
The entire process will be completed when the Beacon Chain is fully implemented, as this is the element that handles Proof-of-Stake. According to Buterin, this should eventually take place in August 2022.
What are the components of the Ethereum Merge?
The elements mentioned above belong to the Ethereum Merge or the update to Ethereum 2.0. We would like to shortly describe these individual domains:
The Beacon Chain is a parallel chain that has been operating alongside the mainnet since the end of 2020. The Proof-of-Stake consensus mechanism will be presented and tested on it. Over time, more and more validators came onto the chain, permitting the proof-of-stake consensus mechanism to function efficiently on Ethereum. The Beacon Chain itself cannot run smart contracts. Its job is to establish proof-of-stake and to place the functionality via its speed. To be completely implemented in Ethereum, the beacon chain must be merged with the mainnet.
The merge describes the merging of the beacon chain with the Ethereum mainnet. Proof-of-Stake was launched on the Beacon Chain and the whole Ethereum network will be transformed to Proof-of-Stake via a merger. The transformation or the merge needs comprehensive testing in advance to eradicate errors before the merge.
The shard chains are planned to confirm that Ethereum’s scalability is massively improved. These extra chains better circulate the transaction load across the network and permit more data to be held on the network. The beacon chain is planned to harmonize the network of shards.
The shard chains were initially planned to be executed in connection with the beacon chain. But the Ethereum users decided that the Ethereum merge was the focus. The development and execution of a network of shard chains are now to be persisted after the merger into 2023.
What are the outcomes of the Ethereum merge?
With the Ethereum Merge, Ethereum 2.0 is finally coming. Ethereum then will use the Proof-of-Stake, which indicates that Ethereum operates much more efficiently and energy-saving. With Proof-of-Stake, gas fees could fall massively and transaction speeds will increase.
But after the merge, the procedure is not yet finished all at once. The shard chains in particular will be executed in the months that follow. The scalability of Ethereum will therefore grow constantly in the coming months.
After the Ethereum merge, the Ether price could definitely notice an increase. A total blast is possible but less likely in the present bear market. But in the upcoming months, the Ethereum price should grow massively. Thus, an investment in Ethereum could be beneficial early.
What the hell is Triple Halving then?
So what is the “Triple Halving”? Let’s start with busting down the name itself “Halving” refers to a notion in the Bitcoin algorithm that implicitly decreases the portion of bitcoin awarded to miners by half, every few years. What this does is it lowers the distribution rate of BTC over time and produces “deflationary stress”. This lessens the BTC sell anxiety from miners trading their BTC prizes. As a result, this pushes the price of BTC to rise as there evolves less supply on the market. Historically, Bitcoin halving events have linked directly with the beginning of crypto bull cycles.
So, Ethereum’s ETH distribution today under the Proof of Work functions a little differently. Rather than algorithmically decreasing the miner ETH prize (i.e. issuance rate), it is accomplished via software updates that have been decided upon by the community :
•Genesis to 2017: 5 Ether
• 2017 to 2019: 3 Ether (changed via EIP-649)
• 2019 to now: 2 Ether (changed via EIP-1234)
According to Etherscan, presently, 6500 new Ethereum blocks are mined per day, which arrives out to roughly 13k ETH allocated per day (~ USD 23,400,000 w/ today’s prices) and disbursed to miners. At these rates, the supply of ETH rises by approximately 4.3% a year.
One of the major causes, why the distribution rate is increased, is to incentivize miners to decide to mine this special blockchain It costs a considerable amount of energy/cash to operate Ethereum miners, so these mining prizes can be considered as ‘bribes’ for supporting to secure the network. Generally articulating, the more miners the network has, the safer it is (as it becomes more costly to push to 51% attack the network) The more capital paid to miners per block, the more miners will contest for the block prize.
A very straightforward game theory that has functioned so far. Now, one of the most significant developments of the merge that has people thrilled is the change to Proof of Stake, which changes the Ethereum network from a miner-secured one to a validator-secured one.
For instance, a validator secured network will decrease the general energy consumption by 99.95%. By creation, validators ingest very small amounts of energy. That’s because they employ game theory implicating capital & penalty to confirm the network rather than exceptional hardware & energy. This instantly renders the first part of this one-in-a-lifetime “Triple Halving” phenomenon.
So, these three parts are explained as follows:
Part 1: Exponential decrease in distribution
Since validators ingest less energy to operate, the network can spend smaller block prizes to deliver incentives for people to operate them. So, the annual distribution of ETH will decrease from 4.3% pre-merge to an evaluated 0.4% post-merge.
This is a 10x decrease in daily sell anxiety on ETH by miners For instance if there is $10 million worth of ETH being traded on the market every day to cover energy expenses to secure the network, post-merge it will only be $ 2 million. Typically, selling pressure decreases means the price will increase. This transformation signals a shift from a mine and dumps economy to a stake and re-stake economizing.
Part 2: EIP-1559: Burn after sending
EIP-1559 is a software update to Ethereum that “burns” a part of each transaction’s expenses.
Using an illustration from a contemporary NFT buy, if it costs 0.01 ETH in transaction fees for you to buy on OpenSea, 0.003 ETH will be burned & emptied from the money supply. As mentioned earlier, normally when supply goes down, the price goes up in reaction. So, EIP-1559 already reached live during the London hard fork in August 2021, so this element will serve as a compounding impact on the overall distribution reduction of the ETH supply post-merge.
Part 3: Lock-up duration
You may have heard of the phrase “Staking ETH” on the beacon chain. What this means is the action of giving your ETH to a validator to support and secure the hereafter post-merge network. As a prize for staking your ETH with a validator and enabling you to secure the network, you are provided with block rewards The present projected income rate is roughly 4% APY but it is anticipated to be more increased due to MEV rewards.
It is currently feasible to stake your ETH with a validator and make a profit, even though you are pre-Merge. Right now $23,263,160,847 worth of ETH is being staked. That is approximately 10% of the whole market cap of ETH! So you might be thinking, won’t everyone simply unstake their ETH right after the merge and dump it? The answer is a big NO.
ETH withdrawals are not presently executed and are scheduled to be added in a post-merge software update. This was accomplished due to dividing the intricacy of installation, testing, and deploying the merge itself from the withdrawal process. The present method is to deploy the withdrawal functionality in a software update 6 mo – 1 year after the Merge.
Also, the withdrawal method will be executed as a cue, to restrict the amount of ETH that can be drawn per day. So in a nutshell, to make profits from staking your ETH, you must stake it with a validator. ETH staking withdrawals will not be public right away, which locks up a considerable supply of ETH that cannot be traded.
To recap, ETH is undergoing –
- The exponential decrease in distribution rate.
- Decrease in supply due to burning of a part of every transaction fee
- Decrease in available supply due to staked ETH being locked before withdrawals are executed.
These three points connect to complete the “Triple Halving”, which is a once-in-a-lifetime sensation.